The official "blog of bonanza" for Alfidi Capital. The CEO, Anthony J. Alfidi, publishes periodic commentary on anything and everything related to finance. This blog does NOT give personal financial advice or offer any capital market services. This blog DOES tell the truth about business.

The waning hours of 2012 have reached the Pacific coast and I'm blogging away into the new year. Here comes one final blast of sarcasm to close out this calendar.

The U.S. Senate and the White House have made a fiscal cliff deal, but the House of Representatives took a breather until tomorrow. The lower house of Congress is missing all the fun. I hear there's free booze for anyone who sticks around and passes the anti-cliff bill tonight. My theory is that someone started a rumor that a "bungee jump" off the fiscal cliff meant a real bungee cord would be installed on the Capitol, and the House adjourned early when they didn't see a jump platform around. Tomorrow they'll figure out that the actual "bungee" is the retroactive provision they can write into the deal that will take back any harsh spending cuts or tax increases that will occur on January 1, 2013.

The French aren't having any more success with their own fiscal mess. The 75% tax on the super-rich is now null and void, so Gerard Depardieu can breathe easier during his self-imposed exile in Belgium. I think France should cut the subsidies its wine makers get from the EU. French wine is overrated anyway and California wine can definitely compete in quality. I don't drink French wine but if the euro collapses the EU will try to hyperinflate it back to life, and then French wine would be dirt cheap measured in my dollars.

Here's wishing you all a happy 2013. It will be happy for me as long I'm sarcastic.

Silvercorp's fundamentals look impressive. Their FCF is positive and they are free of long-term debt. Their EPS growth and ROE are both strong. They even pay a dividend. So what's not to like about a mining company run by geologists? I can't get the accounting questions out of my mind. I also can't reconcile how they continue to report extremely high grades of silver at several projects. I swore off China exposure in 2012 and I'm staying away from it in 2013.

Orocobre Ltd. (OROCF / ORL.TO) is a junior Australian company moving into lithium development. Normally I think of kangaroos and Crocodile Dundee when I hear about Australia, so this means I need to broaden my perspective.

The company's page describing its leadership does not explicitly identify the CEO. Maybe I missed something, but titles like "general manager" don't necessarily mean CEO. Exactly who is in charge here? Even their financial statements aren't clear on that one.

The Salar de Olaroz, Argentina project has MII resources and their Borax Argentina division is producing revenue. They are also developing three other early-stage projects. I have a difficult time understanding their quarterly financial statement dated March 31, 2012 because its format is unlike the U.S. and Canadian statements I usually read. Since their business model is a mix of developmental and established projects, it's fair to consider their fundamentals from a value investing standpoint.

The bottom line on Orocobre is that their earnings and ROE are still negative, so the revenue from their borax operation contributes isn't enough to subsidize their ambitions for other properties. That's why I'm not investing in this one. The major lithium producers have more than enough capacity to satisfy world demand. Junior explorers in lithium are redundant.

South American Silver Corp. (SOHAF / SAC.TO) is looking for silver in Chile. I've never been down there, nor have I eaten Chilean food or dated Chilean women. I suspect the latter two are quite spicy. Mining isn't so spicy but someone has to do it.

The CEO was educated as a mining engineer but doesn't mention who employed him on any of the projects he worked in his career. His LinkedIn profile says he is currently the VP for Project Development at PolyMet Mining, and doesn't mention his position with South American Silver. He ought to update his LinkedIn bio; meanwhile South American Silver's press release announcing his hiring sheds a little more light on his background. I'm harping on this because the CEO's decisions in an exploration-stage junior mining company depend very much on an understanding of geology. Other disciplines matter more in later stages.

The company is also contesting the Bolivian government's revocation of its subsidiary's mining concessions. It's unrelated to the property above but nonetheless casts a cloud over the company. This Malku Khota project is potentially very valuable but the company absolutely must resolve the legal dispute in its favor.

Check out their financial statements for Q3 2012, dated September 30, 2012. They had US$29.5M cash on hand and have a burn rate of about US$1M per month. That gives them more than two years to realize value from their projects.

I am not investing in South American Silver Corp. because I prefer mining companies that have de-risked their projects by establishing 2P reserve data. I also prefer spicy women, as I hinted in my opening paragraph.

Full disclosure: No position in South American Silver Corp. at this time.

Imperial Metals (IPMLF / III.TO) has two operating mines and several developmental and exploration properties. I'd prefer to analyze them using value investing criteria since they are not a startup mining company, but some details of their properties deserve mention.

Their Mount Polly mine is operating but its 2P reserves are very low grade. I'd say the same for their Huckleberry mine. The MII resource grade at their Red Chris developmental project is similarly unimpressive. What are their cash costs of production? I have no idea, but I wonder whether these projects would be worth doing if the price of gold were half of what it is today. The Sterling project, however, has a very impressive 7.41 g/t Au, so here's hoping they get it started. It's too early to tell whether their three exploration properties will pan out.

The CEO and VP Investor Relations have complementary backgrounds, but IMHO they should switch jobs because their respective backgrounds make them better suited for such a move. Think about it; a sales dude should do external relations and a mining engineer should make decisions on mining operations. Rio Tinto wants them there, so ultimately they will execute their part of a much larger plan. The ultimate strategy for the Ovoot Tolgoi project is to ship coal to China. Infrastructure for rail shipment and coal washing won't be problems. They have MII resources but I would like to know their estimated cash cost of production.

Rio Tinto is now stuck with this project and I am not clear on how hard they will press for full development in light of SouthGobi's recent problems. That's why I'm not an investor.

Their financial statements for September 30, 2012 show $17M cash on hand and net losses of $7.7M/month that quarter. I didn't average that burn rate with their nine-month rate because it is significantly lower than what they burned for the entire nine-month period, representing a qualitative shift in their operations. It remains to be seen whether this reflects an effort to conserve cash for future exploration and infrastructure development. Besides, they have little to worry about because they recently had a very successful capital raise.

I'm not investing in this company because I'm not clear on which of their projects will ultimately be successful enough to drive the company's valuation. I'll wait for more definitive results.

The technical report for the development of their Oyu Tolgoi copper-gold project in Mongolia is thorough. If Rio Tinto is confident enough in its potential to operate the project as a strategic partner then there's probably something big there. Their production plan assumes a long-term average price of $850/oz for gold, which is about $200 higher than gold's real average price for the past 40 years. The projected mine life of 27 years (potentially 59 years) is huge, but their estimated grades of Au are shockingly low. It's even more shocking in light of the plan's estimate that mining can recover 79% of the Au, below the typical industry expectation of 85%. This is a bet on the size of a deposit rather than grade.

One look at TRQ's option chain tells me that someone is very optimistic about the company's long run valuation, with hundreds of open positions in January 2014 calls at strike prices of $10 and up. That is a very welcome development in light of the Rio Tinto backing.

I'm not sure about going long TRQ given the riskiness of doing business in Mongolia. The Mongolian government owns 34% of the Oyu Tolgoi project. Counting on credits from gold production to subsidize the cash cost of producing copper is also a risk, as those two metal prices don't necessarily move in tandem. They also have other exploration projects that may or may not pan out. Still, the momentum behind the Mongolian project is undeniably large and may very well sustain the entire company's valuation. I may decide at some point to sell cash-covered puts under TRQ now that the Oyu Tolgoi project is ready to contribute earnings.

Full disclosure: No position in Turquoise Hill Resources at this time, although that may change in the near term.

Strata Minerals (SMP.V) wants to mine phosphate in Australia. I have concerns about the management team's experience. The CEO and other key team members are primarily from the finance and beverage sectors; some of them have mining sector "experience" but that appears to be confined to corporate development work and not actual mine operations. The company either needs to specifically articulate the relevant mining operations experience of these people or get some new people who have that experience. Mining company managers absolutely must know how to pull rocks out of the ground.

Their Cardabia, Australia project probably has a transportation cost advantage over phosphate from Morocco, but this is less compelling than a production cost advantage. I'm even less confident about their Savory Basin project, which has no modern exploration history. SEDAR has their NI 43-101 report dated July 4, 2012; it identifies no resources but recommends a Phase 1 exploration budget of AUD$500-650k and Phase 2 exploration of AUD$2-3M.

It is too early to tell whether Strata Minerals will succeed in finding economically viable phosphate deposits. They deserve another look in a year or so when their exploration program has quantifiable results.

Stonegate Agricom (SNRCF) is developing phosphate projects. I need to figure out just what's going on here. Morocco dominates the worldwide market for phosphate and can dictate prices across the entire production chain, so any production change from that country will impact the valuation of any phosphate producer in the world. One thing limiting the ability of Morocco to hold prices down through overproduction is the rising demand for fertilizer worldwide. Emerging market consumers want more meat in their diet and farmers need more fertilized cropland to meet that demand. Phosphate concentrate is probably the better part of this business sector to operate because fertilizer producers want more of it.

The CEO has a background in mining engineering but hasn't worked in that field in several years. Technology and processes do change. The good news is that the general managers at each major project are qualified engineers with experience in phosphate and coal projects. A coal background is useful because coal deposits have uniform geologies that resemble phosphate deposits.

The company's Paris Hills, Idaho project has road access to a Union Pacific rail line a few kilometers from the property. Their Montaro project in Peru also appears to have ready access to a rail line. Having logistics in place is always good news. Both properties have NI 43-101 reports on their MII resources, but of course I need to evaluate 2P reserves to make an investment decision. Phosphate producers should monitor a project's calcite, minor element ratio, and chlorides but those don't appear to be significant problems for Stonegate Agricom.

Two economic factors determine the viability of any resource extraction project in the world: the spot price of the commodity in question, and the cash cost of extracting the resource. The price of phosphate right now is about US$185/ton. Expanding the date range on that Index Mundi chart to 30 years reveals that the worldwide long term average price of phosphate ranged from $31-45/ton until 2007, when it spiked to over $400 and then crashed to $90 in 2009. I do not know what happened in that time frame to cause such a spike. This is important to note, because if the new normal price floor for phosphate is now over $90/ton then previously unprofitable deposits outside Morocco will be economically viable. The risk for any producer is the possibility that Morocco could flood the world phosphate market with production that drives the cost under $90/ton.

The Paris Hills 43-101 report estimates a cash cost of $73/ton, with an upfront capital cost of $149M. That cash cost definitely makes the project viable at present market prices and it will probably remain viable over the entire life of the mine (unless of course Morocco pulls the rug out from under the world price). Funding the capex is a different story. Stonegate Agricom's most recent quarterly financial statement on SEDAR is dated September 30, 2012. They had C$7.3M cash on hand on that date; averaging their three-month and nine-month net losses gives them a monthly burn rate of about C$700k. They can survive until late July 2013. Raising capital may not be a problem for them if they continue to secure loan facilities from Sprott Resource Corp. as they did on August 21, 2012.

A lot of junior explorers and producers want to hit it big in phosphate and potassium/potash plays. These companies are a lot riskier than the big producers like PotashCorp that dominate this sector. Meanwhile, Stonegate Agricom will probably keep chugging along in pursuit of capex funding for Paris Hills.

Full disclosure: No position in SNRCF or other companies mentioned at this time.

They have an NI 43-101 report for their flagship El Aguila project, although as a U.S.-listed corporation they really don't need one. I find it interesting that the report only addresses MII resources (no 2P), yet this company is operating a producing mine at El Aguila. They also have four other properties in development but are returning cash to shareholders as a dividend rather than holding it to fund future development. I couldn't see the logic behind such a decision until I looked at their operating costs. I am very intrigued by the 43-101 report's estimate that the project's operating costs are US$136/oz of Au equivalent. That is extremely cheap gold! No wonder the management was so confident about beginning operations before 2P was confirmed. They can afford to return money as dividends because they save so much cash in production.

I normally consider a junior mining company's ability to stay alive, but since this one has an established operating history it's more appropriate to use the fundamental screening criteria for a mature company. They were profitable in 2011 but not in the two years prior. It's good that they have no long term debt and positive free cash flow. It's bad that their five-year ROE has been negative. That number is a legacy of the losses incurred in the years prior to production. Producing gold at $136/oz makes their main mine profitable at any of gold's historic annual price averages in the past three decades.

Gold Resource Corporation may very well have turned a corner in 2011. The two co-founders did so well with their previous venture, U.S. Gold Corp., that famed Canadian investor Rob McEwen put his own name on it. I am really going to keep watching GORO to see if there's a repeat performance.

You'd think that a major silver producer like Coeur d'Alene Mines (CDE) would be able to write its own ticket with silver prices in the stratosphere. Think again. The company has manageable long-term debt so long as they can maintain their present net income. That is in doubt; they suffered major losses in 2009 and 2010, and the quarter ending September 29 showed another loss.

The fundamentals just aren't compelling enough for me to dig deeper into the company's problems or wait for a turnaround. There are other silver producers in the resource sector that deserve my attention.

Their main projects are concentrated around Schefferville, Quebec. None of their projects appear to have any NI 43-101 compliant confirmation of 2P reserves. That's my main driver and I don't see it. There is a railroad through their Block 103 and a major multinational steel firm has a plant nearby that could probably handle milling, so infrastructure is less of a concern with these projects.

They haven't posted any financial statements to their website as of today, so I had to search SEDAR for their annual statement dated August 31, 2012. They had C$2.9M in cash on had at that time and had a net loss of C$4M. Since then they raised a private placement in three tranches (C$3.5M, C$1.36M, and C$740k). This C$5.6M in cash should keep them around for another year, but it's hard to make more than a guess without seeing how their burn rate changes in subsequent quarterly financial statements.

Cap-Ex's share structure frankly scares me to death. They've already issued almost 76 million share and they'll need a lot more capital to make it through further exploration before they even get to a production decision. Shareholders can expect more dilution after future fundraising rounds.

Cap-Ex Ventures isn't for me because I need to see definite 2P reserves and solid management in a junior resource company. It's interesting to note that the share price has crashed from about a buck to around US$0.27 today ever since Forbes & Manhattan entered the picture a year ago. Nice work, folks (I'm being sarcastic).

It's one day after Christmas and I'm not any less sarcastic than I was yesterday.

The fiscal cliff is approaching and the relevant parties just can't stop launching trial balloons to impress the folks back home. Both parties want to lower corporate tax rates in the name of competitiveness. There's no way such a complicated reform will get done this year but that won't stop the preening and posturing. Lowering the corporate tax rate while eliminating deductions probably won't raise revenue but it will make CFOs' jobs easier, so maybe some grateful corporate treasuries will step up their giving to super-PACs.

Some New Jersey union pension fund is suing to block the NYSE-ICE merger. Come on already. They should be grateful anyone wants to buy an American exchange at what is likely the high point of the U.S. equity market. That means ICE is probably at its high-water mark too, and competition from dark pools and internal crossing networks make this merger all the more fortuitous for both exchanges' shareholders.

The primary Treasury dealers are dumber than ever. They're hoarding bonds and reducing sales to the Fed. This is the wrong thing for a dealer to do with the U.S. bond market at an all-time high. The smart thing to do is unload winning positions onto the last sucker in the room - the Fed, of course - and shift the bank's business lines into things like non-dollar debt from emerging markets.

Shoppers didn't come through for retailers this year. I've been waiting for a downturn in retail activity and this one's been a long time in coming. Better late than never. The average American probably has enough unused stuff in their closets and storage sheds to equip several emerging market households, and yet buying more stuff is in our cultural DNA. The silver lining to any hyperinflationary period is that ordinary folks will be cured of their impulse to consume with abandon.

Finally, the SEC gets my Alfidi Capital award of the day (okay, there's no such thing but it sounds generous) for innovation. The agency charged with regulating our capital markets is finally acquiring a system that allows it to watch the capital markets. Funny, I've been using ordinary financial websites and online brokerages for almost two decades. In true government contracting fashion, they bought a complete system rather than subscribe to terminals and feeds from Bloomberg and Dow Jones. I recall reading during the financial crisis of 2008 that the Treasury Secretary had the ability to monitor credit markets in real time from his desk. I don't have to name the Wall Street players who have a vested interest in the keeping the SEC blinded, in exchange for future private employment for the agency's top investigators. In that context, I expect the SEC's new market monitoring system to work exactly as intended, especially since initial access to the system will be limited to a handful of people. Read between those lines.

The stock market was on a reduced hours schedule on Monday and I didn't make any portfolio adjustments until today. I figured even my brokerage's computers need a break for a few microseconds. Here's what I did with my money today.

My short covered calls on GDX expired unexercised, so I renewed them. I'm willing to risk seeing that long position sell off if it breaches the strike price. Gold of any kind will prove to be a poor hedge by itself against the inflation we'll see at some point in the U.S. A position in gold stocks is probably okay as a cash-generating hard asset position, but I am considering other hard assets to add to my holdings.

I also sold short some cash-covered puts under GDX. Given that security's recent decline in price, I wouldn't mind picking up some more near its 52-week low.

I made no changes at all to my positions in FXA, FXC, and FXF. I will continue to hold the currencies of countries with well-managed fiscal policies and non-inflationary central bank monetary policies. I am particularly encouraged by recent public statements of the central banks of Australia and Canada. Those countries will probably stay on their low-inflation courses while the euro and U.S. dollar fall apart.

I am not at all interested in dollar-denominated fixed income holdings. Inflation will destroy cash, CDs, and bonds but that's what the Bernanke Fed is trying very hard to do. I will commit cash to equities in energy, resources, and related hard asset sectors when I see some bargain prices. That's all for this month.

Sometime in the last five months, Olympus Pacific Minerals changed its name to Besra Gold (OYM.TO). I have no idea why they did this and I don't even care. I only care about a company's fundamentals.

The management bios they have on their corporate site are the least descriptive of any mining company I can recall in recent memory. Nowhere in the CEO's blurb is any description of exactly which positions he's held in the resource sector. His bio sketch does inform us that he's an avid oarsman. Wait, there's more. The group exploration manager's bio says that"he knows what he's talking about" when it comes to geology. Another guy's bio says he loves grilled cheese sandwiches. Another guy says he holds a "Batchers degree." I can't take this seriously. My own corporate FAQ and professional biography are probably the least serious of their kind in the finance sector, but that's because I can afford not to care what anyone thinks of me. A junior mining company is in a different position, especially if it has to raise capital.

Hey, Besra people. If you're serious about mining then please polish your executives' bios. Also, show us all the actual 43-101 reports you used to create that summary table. Oh, BTW, try to make a profit.

Full disclosure: No position in Besra Gold (or whatever it's called) at this time or any time.

Colossus Minerals (COLUF / CSI.TO) wants to mine gold and PGMs in Para, Brazil. The best things that have come out of Brazil IMHO are Pele, churrascaria cooking, and string bikinis. Maybe this mining company can throw something else into that mix.

Their Serra Palada property has an exploration history. Their preliminary drilling shows unbelievably high ore grades, which begs the question of why the historical open pit that operated there was ever closed (I'll let that go unanswered since I don't know the backstory). Aerial photos of the site show an internal road network and accessible water (those are good things BTW).

Colossus has a lot of confidence in itself based on the infrastructure they've emplaced so far. I await the publication of the initial 43-101 report to see whether the astonishingly high grades they obtained in sample drilling will translate into MII resources.

Their Tembo property may have promise. I think they did something brilliant by overlaying plotted artisanal mine activity onto their aerial magnetic survey results. Tembo's 43-101 report from July 2012 does not reveal any MII resources but does recommend a $12M follow-up exploration program. I wonder how they're going to fund this next phase.

Tembo Gold's financial statements for June 30, 2012 show C$426k in cash on hand, plus C$4.6M in short-term investments. The notes to their financial statements do not reveal any encumbrances tied to those investments, so I will consider that as part of a total cash reserve of C$5M. Their burn rate is about C$520k/month (averaging their three-month and six-month net losses), and they closed a financing round for C$4M in November. This gives them enough cash to survive until the end of December 2013. It is difficult to determine how much of this raised cash will be devoted to their follow-up exploration.

Some of Tembo's drill samples show some incredibly high grades but that's not enough to entice me to invest. Let's see some 2P reserves first. Oh, BTW, Tembo should hope the Tanzanian economy becomes more transparent.

The capital markets are closed for Christmas but Alfidi Capital never sleeps. The holidays are a perfect time to get sarcastic.

The stealth nationalization of health care payments will really get going in 2013 with new tax increases. I fully expect employer-sponsored health insurance plans to be taxed as the equivalent of income. I admit the principle of taxing a benefit makes sense; after all, if cash compensation from employment were higher then workers could pay for health insurance out of pocket. Employees really don't know the difference because this tax break encourages companies to enroll their workers in plans. The health insurance sector will love this tax but most small businesses will hate it. I also expect small businesses to accelerate the transformation of full-time positions into part-time jobs to avoid providing health care and paying this tax. The insurance sector has begun its sea change toward a system with the federal government as single payer. You will be forced to pay a premium for routine access to an overstressed system because the government isn't the least bit interested in controlling costs.

It's hard to ignore the scary headlines about no fiscal deal forthcoming in Washington. Hitting the fiscal cliff would be good for America so we can all get the shock of living within our means and living with reduced benefits from our government. Politicians don't want that to happen but don't want to explain anything to folks back home. The real deal will still get done in a couple of days, just like the last debt-ceiling emergency, and everything will be fine until the bond market boycotts a U.S. Treasury auction.

I hope you're all enjoying this year's winter solstice. That's what Christmas used to be before Emperor Constantine foisted monotheism upon the Roman Empire and politically appointed clergy began appropriating pagan holidays. I celebrate today with the original intent in mind, devoid of late-Roman innovations.

Detour Gold (DRGDF / DGC.TO) deserves applause for moving toward production. The management team is mature. The CEO is a geologist and the rest of the team has experience in project development and mineral processing. I don't think I could ask for more from the leadership of a growing mining company.

The company owns its Detour Lake project outright and their 43-101 report data is available. This site has almost half a billion tons of 2P reserves at an average grade of 1.05g/ton. That's not bad given declining grades worldwide, so full production is justified. They estimate the total cash cost of production at C$749/oz, which is about $100 higher than gold's long-term average price. This mine is clearly viable so long as the world market has elevated expectations for the price of gold. Any bullion price crash would hurt Detour Gold's valuation. BTW, their projected IRR of 12.4% after tax is far below the 25% threshold favored by major institutional investors in the resource sector.

Since they're in production at their Timmins West project, the important factor now is the cash cost of production at $970/oz. The good news is that Timmins West's extraordinarily high grade of 5.21g/ton makes production very much worthwhile. The bad news is that this cost is far above gold's historical average price. Inflationary central bank policies that keep the gold bull market roaring will drive this company's valuation until they can reduce those costs to a sustainable level.

The stock is still low-priced because the production at Timmins West can potentially subsidize their other exploration properties. That's fine as long as Lake Shore Gold delivers positive earnings overall. They have not done so yet. Their Q3 financial statements for 2012 show net losses of about C$2.6M per month (a rough average of their three-month and nine-month loss rates). It's good that they have C$83.5M in cash in hand, enough for more than two years. Investors shouldn't have to wait that long for the company to either find decent grades at its other exploration properties or drop them and focus on Timmins West. I await the outcome of that decision.

They have a convenient summary of their projects' 43-101 reports. It's really nice to see a complete set of initial reports for an entire company's project portfolio, and I don't think I've seen that for any multi-project junior I've analyzed this year. The Shakespeare project is the only one with probable reserves. Given the low grades of gold and base metals at Shakespeare, I think it's safe to say the market prices of the platinum group metals (PGMs) will drive this company for the foreseeable future. Platinum is over $1550/oz and palladium is around $680/oz, different from the prices used in the Shakespeare feasibility studies. Those metal prices have been on a tear for several years.

Prophecy Platinum is still drilling and surveying its projects. Their updated feasibility study for the Shakespeare project was published in 2008, and four years later they still haven't commenced production. The study predicted that production would have begun by now and didn't anticipate delays of special equipment deliveries longer than three years. These delays won't be resolved until they have 2P reserve data for their Wellgreen project (which already has some road infrastructure) and/or sufficient capital to build out the Shakespeare project. I don't invest in companies that suffer interminably long delays.

Prophecy Coal (PRPCF / PCY.TO) is trying to make a go of the resource sector in Mongolia. It's too bad Genghis Khan isn't around today or he'd whip that whole country into shape. In the meantime, folks have to do business the modern way.

Their main project is coal from Ulaan Ovoo. Their 43-101 report from 2009 reveals MII resources but no 2P reserves yet. The single most important number at this stage is their estimated cash cost of production at $56/ton. That is an extremely high figure, far above the preferred threshold of the lowest quartile on the world's cash cost of production curve. Mongolian utilities would be better off importing coal from Indonesia, where the average cash cost is about $35/ton.

Their proposed power plant at Chandanga has been permitted but they have not begun construction. The coal project at Chandanga that is supposed to fire this plant has a 43-101 report, estimating the cash costs of production here at under $38/ton and declining in future years (according to their latest update dated November 2012). That is a far more price-competitive project than Ulaan Ovoo.

Prophecy Coal does have other projects but the key takeaway is that they all have 43-101 summaries of MII resources. None of the properties they're exploring or developing have 2P reserves, so more exploration needs to de-risk this enterprise.

The company's most recent financial statements for Q3 in 2012 show C$4.5M in cash on hand as of September 30. Note that this does not include the C$10M in restricted cash the company has pledged to obtain exploration licenses from Tethys Mining LLC; that cannot be used to cover operations. Prophecy Coal's burn rate is about C$1M/month, so they will have to raise more capital before their cash runs dry in mid-March 2013.

Their plan seems to be to initially sell coal directly to Mongolian power plants, but Mongolia is a small energy market. I've never heard of a penny stock building a 600MW power plant; that's something a large utility would normally do. They will have to raise a tremendous amount of money to build that power plant and extract coal. That's a bit too risky for me.

Sunday, December 23, 2012

Pan Global Resources (PGZ.V) wants to mine lithium in Serbia. There's a global supply glut for lithium right now, with the world's top three producers more than able to meet the world's needs from their existing reserves for the forseeable future. This company's valuation will be driven by its borates, not its lithium.

The CEO's background is hard to understand. A degree in science does not necessarily include a focus on geology. Directing business development and regional exploration are the kinds of things an MBA guy like me could do. Directing a mine from exploration to production is something else. The directors have diverse mining backgrounds but they're not the ones doing the work or making daily operational decisions.

Two of their projects have NI 43-101 reports. Further development of Jadar West and Valjevo will require US$585k each, or $1.17M if you can't add. Neither report contains verification of any MII resources so there's nothing to justify a higher valuation yet.

I do not know whether they will complete their drill program next spring with sufficient data for a 43-101 report on MII resources. That uncertainty, plus the world market's oversupply for lithium, makes me shy away from this company. Maybe their borates will prove to be worth something.

Some weeks or months ago I got a mailed teaser from someone calling himself Fitzroy McLean from an outfit named Without Borders. This dude claims to be a former U.S. Army Ranger and CIA operative, which of course makes me wonder what any of those things have to do with stock picking. The guy's LinkedIn profile makes me wonder when he would have had time to serve in the CIA's Clandestine Service as he claims in his mailer. If he graduated from West Point in 1988, his five-year active duty service obligation would have expired in 1993, which means he would have had less than a year with the CIA before becoming an investment banker in 1994. "Fitzroy McLean" is welcome to contact me any time he likes to discuss his bona fides. I'm hazarding a guess that he's a fake, taking his name from the real Sir Fitzroy MacLean, a real-life covert operative.

Anyway, this article isn't about him or his assumed identity. It's about the stock he's pumping, specifically VLOV Inc. (VLOV), a Chinese clothier. I am not an expert on the Chinese clothing market. Big deal. China's headed into a recession just like the rest of the developed world and your average Chinese upper middle class consumer will be hard-pressed to buy upscale clothing.

Their Songwe project in Malawi has a 43-101 report. Good for them but I would like to see a final report with 2P reserves. Photos of the site show a scratched-out dirt road but it's unclear whether it connects to the nation's larger transportation network. They need C$1.6M to complete the next phase of drilling, modeling, and economic estimation.

It's hard to tell whether they have the financial strength to move forward with that plan. The most recent financial statement they show on their website was for a company previously named "Alloy Capital." Searching SEDAR reveals interim financial statements for Mkango dated September 30, 2012. These statements reveal C$645k in cash on hand at the end of September, and with a burn rate of over C$100k/month they'll run out of cash by March 2013 unless they raise capital. Shareholders can thus expect serious dilution unless Mkango is willing to option out part of the 100% ownership of its Songwe property.

Management deserves kudos for keeping expectations realistic, and I'm not about to compare them to Mountain Pass until they have a firmer understanding of their ores. Since they only have one key leader who has gone all the way to production, they don't have the bench strength to go it alone in this corner of the world. The driver of Mkango's future valuation will be the quality of whichever strategic partner they bring in prior to a production decision. That uncertainty, plus the lack of clarity for their financial health, makes them too risky for me.

NovaGold (NG) is all about one thing - gold. Specifically, they want to make their Donlin Gold project viable and have stated their intent to divest their interest in their Galore Creek project to stay focused on gold. The Galore Creek property's grades of gold, silver, and copper don't look very promising anyway, so that's a good strategic move.

I like the fact that the CEO has a background in mining. You've heard me state before that a prefer a geologist at the helm of a young company, but with a company that's ready to make a production decision it's better to have a mine operator.

NovaGold has a 43-101 statement for its Donlin Gold project. The proven and probable resources have a grade of Au 2.09 g/t, which is pretty dog-gone attractive considering the declining grades miners are finding worldwide. I am very intrigued by that report's estimates of the projects cash costs of production, which are significantly less than gold's historic average price of $615/oz.

Their Q3 financial statement for 2012 shows C$267M cash on hand at the end of August. Their net losses amount to a little over $6M/month, so this burn rate gives them a life span of over 44 months. They can survive more than twice that long if they sell the Galore Creek property at its $381M book valuation (yeah, I know, these kinds of things can get written down but they'll get something for it).

The most attractive aspect of this company for me right now is its beaten-down share price. It's trading over four bucks a share right now, pretty far from its 52-week highs. The fact that Barrick Gold retains a 50% interest in the Donlin Gold project indicates its attractiveness. I haven't made a decision yet to go long because the company still needs a mature infrastructure at the site. I am nonetheless interested in watching this one.

Full disclosure: No position in NG at this time, although that may change in the near future.

The headache I often have with these types of companies is with the way they structure their project. They bury the project information so deep in the Florence Copper website that it's difficult to identify the management team or ascertain whether there's a 43-101 report with proven and probable resources. That means I can't pass judgment on whether this copper project can live up to whatever potential it may have until I find those items. I also can't find any SEC filings for Curis Resources, which is odd for a publicly traded company. Let's see some verifiable facts besides the typical brochure stuff.

Cardero Resource Corp. (CDY / CDU.TO) is part of the Cardero Group. Don't confuse the names. I'll be talking about the junior explorer today and not its parent. This company is out looking for coal, or iron, or something. The thing with families of prospect generators is that they must move along quickly if they can't find anything worth mining at a given project.

The CEO knows his coal, so at least they put the right person in charge. Their corporate structure is unique; they have separate wholly-owned coal and iron companies presumably to accommodate the properties they're exploring. I don't often see that in a company that was itself created from a prospect generator parent.

The company seems to have enough cash on hand for at least another three quarters but their lack of success in exploration raises questions about what they can do with this money even if the Rochester question is settled in their favor. Note 1 in their Q3 2012 financial statements admits that their continuance as a going concern depends upon raising more capital. BTW, I don't see any financial statements for Q1 of this year.

Maybe Rye Patch will get lucky with one of these properties, but I won't stake my own money on such an outcome. Maybe they can keep leasing out land to geothermal explorers.

Some investors let emotions rule their thinking. Big news events that hit close to home have an impact that financial models can't measure. Bad news about one school can upset teachers anywhere, and their plan sponsors' money managers are paid to listen. A state pension plan forcing its money manager to leave a healthy firm should be able to explain to its pensioners why it won't be able to pay their benefits if it can't achieve its target discount rate.

Uncle Sam will probably be just as slow in recognizing the weak demographic assumptions underpinning entitlement spending. The slowdown in legal immigration due to the prolonged recession is probably offset by the large numbers of illegals who remain here and have kids. The irony of illegal immigration is that our own government encourages illegals to apply for benefit payments while they are paid off-the-books income that can;t pay into Social Security or Medicare. Illegal immigration makes the unfunded entitlement problem worse and no one in our business or political elite even cares. My solution is simple. If you apply for benefits, please include your U.S. birth certificate or naturalization papers with your application.

Meanwhile, private equity firms have learned nothing since 2008. They are using more leverage than ever to buy companies whose earnings will be destroyed in the next round of the recession. Borrowing at record-low interest rates isn't such a great idea when the earnings needed to pay back those debts won't be there. I'll be watching the headlines for the first private equity firms that go bankrupt next year.

Sell-side analysts have learned nothing from last decade's master settlement. Some Morgan Stanley banker got his firm smacked for coaching Facebook on how to materially mislead analysts. That $5M fine is peanuts, so this is hardly going to hurt anyone other than that one banker. State regulators are paying attention while the SEC is asleep. My readers should be grateful that all of my articles reference facts already in the public domain. Anyone idiot can mislead analysts on a conference call. Only a genius like me can tell the truth.

I sift through a lot of materials on mining stocks looking for anything that fits my risk tolerance. A lot of movement in a junior mining stock's price is defined by an S-curve often attributed to Pierre Lassonde, a legend in the mining industry. The Lassonde Curve posits that a mining company's life cycle has four stages: exploration, feasibility, construction, and production. Valuation is the vertical axis and time is the horizontal axis. A company's valuation climbs rapidly during the exploration phase until it peaks with a pre-feasibility study, at which time it troughs during the feasibility and construction phases as the market realizes just how difficult it is to raise the large amounts of capital needed to make it to production. The valuation bottoms out at the end of the construction stage, when the bulk of the company's capex budget has been spent. Once in production, the valuation starts to climb again.

A lot of random stuff can drive an S-curve's movement. Mr. Market can have his way with a junior stock's valuation. Sometimes macroeconomic news clobbers a stock even if it showed progress with an NI 43-101 report showing above-average 2P reserve grades. Announcements of positive developments like a pre-feasibility study, successful financing, and permitting approvals can "de-risk" a junior stock and make the S-curve jump northward. I think the term "de-risk" is overused. I chuckle when I hear exploration-stage companies say they've de-risked a project simply by walking around the site or looking at a map of old claims.

I'm a big fan of aeromagnetic surveys, especially if they save money by accelerating a drill program. I've noticed that some old-school prospectors view them skeptically, possibly because such surveys pose a threat to their careers. Exploration companies that use the hot spots from geospatial data to focus their drilling programs can reduce the possibility of striking dry holes. One key limitation of these surveys is their usefulness only in areas with layers that generate contrasting magnetic signatures. A uniform geology won't yield much useful data from the air.

LIDAR surveys can come in handy after an ore body has been mapped, so engineers can estimate the feasibility of mining with a given topography. Competent mining executives can put these surveys in the proper order. That's why I need to see a geologist as the CEO of an early-stage mining company. I don't mind seeing a mining engineer running the company at a later stage once they have enough data and money to begin constructing a mine. I don't ever want to see a mining CEO whose sole background has been finance or consulting, because that tells me the main investors and board members just want to flip a hopeless property to bag-holders.

Engineering studies can produce isometric models of an ore body. These are pretty to look at but mining executives can easily gloss over them in presentations to non-engineer audiences. It's easy to say "veins are open in all directions" because that's what investors like to hear. It's harder to point to a vein and explain why that part of the geology leaves it open. It's also easy to ignore now complex the geology can be while drilling down into an ore body. More complexity means a higher cash cost of production; that S-curve's movement upwards will be slow and sticky.

Driving along a mining stock's S-curve is a little bit like driving a coastal highway. It can be thrilling and nail-biting. The difference is that the highway's curves are defined on a map but the stock's valuation curve always changes, even after you've convinced yourself it shouldn't. The long-term trend of a junior's S-curve should be upwards if they are prospecting good grades, because that's what major producers want to acquire. There's an old truism: "If you've got grade, you've got it made."

It is possible that a 2LT could be asked to assist with a budget forecast if he were a battalion staff officer but the battalion executive officer (XO) would not have handed off such a task without some detailed guidance on where to look for data. Sovereign Man's other posts have hinted that he was independently deployable for much of his early career, which makes little sense if he were fresh out of a military academy and initially assigned to a battalion staff. If he were leading a platoon or detachment, which is what he would have had to do to be eligible for his exotic adventures, it is very unlikely that he would have been tasked to work on the battalion's budget.

Anyway, what really unnerves me about the substance of his claim is that he states he was "responsible for requesting how much money my unit would need to operate… 2, 3, 4, 10 years down the road." That is simply impossible. I have over 17 years of military experience at every echelon of the United States Army from platoon to theater, both active and reserve component. I have participated in numerous budget planning sessions both as a commander and staff officer. Not once did any of my MTO&E or TDA units ever prepare a budget forecast that extended past a single fiscal year. Battalions and lower echelons have no way to estimate their budgetary needs farther than a year in advance, and certainly not the "2, 3, 4, 10 years" that Simon Black claims he did. This is because Congressional appropriations for Operations and Maintenance (O&M) accounts that fund tactical units are tied to a one-year fiscal cycle.

I'd like to hear Simon Black tell us all exactly which unit he served with and how he reconciled his duties as acting budget officer with whatever fantastic James Bond mission schedule he claims he executed. If he's really so intelligent, he can figure out how to reach me.

The estate tax plan from United for a Fair Economy, which Mr. Buffett has endorsed, reduces the estate tax exemption threshold from $10M to $4M. This will harm the middle class and those who try to raise their status into the upper middle class more than it will harm billionaires. The ultra-rich who signed up for Mr. Buffett's big giving pledge have already structured their estates to pass into tax-free foundations and giving vehicles they control through trust agreements. George Lucas' designation of the proceeds from Lucasfilm's sale to a charity he favors is a classic example of how the ultra-rich can always avoid estate taxes. Giving your own money to a non-profit you control is a legal way to continue paying your living expenses. The aspirational middle class may not have access to the same kinds of estate-preservation strategies unless they can afford very competent wealth managers and tax attorneys. This is why the proposed policy's endorsement of a strong graduated tax on larger estates is meaningless.

True estate tax reform would begin with the elimination of the tax deductibility of charitable contributions. That won't happen, of course. Non-profit executives who derive their funding from endowed foundations would lobby against it and so would wealthy donors who fund political campaigns.

I'll give you a plan for real, comprehensive tax reform. Have the U.S. Treasury study the history of tax collection in the U.S. and identify the point on the Laffer Curve that maximizes gross revenue. I suspect it's somewhere between 16% and 19%, which means Warren Buffett probably isn't undertaxed at all if he pays 17.4%. Once we've identified that optimal point, make that the flat tax rate for all income with no deductions, exemptions, or carry-overs for any reason. Taxing earned income, unearned income, capital gains, and estates at that one rate will enormously simplify the government's operations. It will also render redundant the hordes of accountants and attorneys who perform little productive work. Tax planners represent as much of an overhead burden for the economy as tax collectors. I know the federal government will never adopt my plan because I can't bundle as many campaign contributions as Warren Buffett.

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Alfidi Capital is a private financial research firm.Alfidi Capital is not affiliated with any broker-dealer and does not manage money for clients.All information mentioned in this blog is derived from public sources.Alfidi Capital makes no representation as to the accuracy or completeness of this information.Alfidi Capital and its owner, Anthony J. Alfidi, may from time to time hold long or short positions (including options, warrants, rights, and other derivatives) in the securities mentioned in this blog.This blog is provided for informational, educational, and entertainment purposes only and does not constitute a recommendation or solicitation to execute a transaction in any investment product.Investors should consult with a properly licensed and registered investment professional before making any investment decision.The bottom line:Enjoy reading this blog, but the risk you take with investing is entirely your own.